Protect yourself when co-buying property by drawing up a co-ownership agreement
Buying a property with a friend or sibling was a common transaction a number of years ago. For many they simply had to because they couldn’t borrow enough in their own name as prices were beyond their borrowing capacity.
The solution to the problem was obvious for people who were in the same situation - let’s buy together, become housemates for a couple of years, and in that time, the property will have increased so much, that we can sell it, make a shed load of money each, which we can then use to purchase a property in our own right.
The assumption was based on the value of the property increasing, and the relationship was going to continue to be strong and amicable. Even the best laid plans don't always work out, and I continue to see fallout from this.
I get so many calls from people whose property didn’t increase in value - it actually decreased significantly and is still heavily in negative equity. But another problem, and sometimes an even bigger one, is that their personal circumstances have changed.
Some have new partners, a new job, and want to move on from the property they bought with a friend or sibling but can’t because they are still party to a mortgage on a property they may not have even lived in for years.
Their friend or sibling might still be living there and might be paying some, or all, of the mortgage. They might be happy to continue to live there but how can the other person get out of that mortgage that is now holding them back, and how do they get compensated for the years they made mortgage repayments?
Should they ask their friend or sibling for a refund because they are handing over ownership of the property to them? Surely there should be some recompense for this? And what if the property goes up in value in the years ahead? Is there a way they can future proof their interest in the property if this happens?
There are many scenarios depending on the circumstances of the initial purchase i.e. how much did each contribute towards the initial purchase, what percentage of the mortgage repayment was paid by each, how long they have been living there or not living there and so on.
All of these factors will influence what someone thinks they are or may be entitled to and ultimately what both parties will agree to.
It’s easy to get caught up in the excitement of buying a property. Sure, you will never fall out, and nothing bad will ever happen and hopefully nothing will but unforeseen events happen, so you need to have those conversations first, so you both are on the same page.
What happens if I want to move out? What happens if we break up, who will pay the mortgage? How do we agree on how much the other is entitled to? I appreciate these are uncomfortable conversations to have, and I don’t want to seem like a killjoy but not every relationship is successful, and I come across situations all the time where individual circumstances have changed, relationships break down and the impact becomes much more personal when money is involved. I have seen it tear families and lifelong relationships apart.
Last week was a case in point, when I received a call from a person who bought a property with his sister.
Two years after they bought, she began a relationship, moved out of the property and moved in with her partner. She now wants to buy a property with him. And, she wants her brother to buy her out and is looking for €20,000 from him.
The house is in negative equity so not sure how she came up with this amount, but it has led to serious difficulties between them, and last week he received a letter from his sister’s solicitor advising she would start legal proceedings against him unless he paid her.
I’m not sure what grounds she has but whether she has any or not, I can’t imagine how he felt when he opened that letter. To make matters worse, other siblings have begun to take sides and, before long, I fear this is going to get out of control and things will be said and actions taken that will be hard to recover from.
My point is all of this stress and difficulty could have been avoided if they had drawn up a co-ownership agreement while they were in the process of purchasing the property.
A co-ownership agreement is a written agreement between the parties who buy a property together, and it formalises how they will deal with the property in the event of certain things happening.
What a co-ownership agreement will explicitly state is what share of the property each has (larger deposit contribution or larger mortgage payments may have been made by one side). If you don’t have one, the ownership would be classed as 50/50.
It also covers what steps will be taken if one party wants to vacate and sell the property and the other doesn’t; who will pay the mortgage if one person moves out; what each will be entitled to if the property was ever sold; how you will determine the value of the property; what happens if one person dies and how their share of the property is treated etc.
So there is a lot to consider but really important that these issues are addressed from the get go. My advice would be to get a co-ownership agreement drawn up covering every scenario you can think of.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie